Cost Reduction

Considering the implications of cutting expenses

Companies are looking to reduce costs as the Canadian economy weakens. But the problem with many cost-cutting measures is they are implemented without considering the long-term impact. Short-term cost-reduction initiatives can hurt corporate infrastructure and culture, leaving companies struggling when the economy recovers.

A number of energy and mining companies in Alberta recently announced reductions in capital spending and expansion plans as commodity prices plunged and the economy slowed. But if the price of commodities suddenly jumped — as they have in the past — then these companies might not have the proper resources to meet an unexpected surge in demand.

At the same time, there are cost implications of errors in tax compliance. These can include exposure of your company to non-deductible interest, penalties and possible damage to its reputation. This takes up valuable management time and energy dealing with prolonged tax audits. Effective tax planning from both a corporate and indirect tax standpoint will prevent the needless overpayment of taxes and possible misstatements in the tax charge on your company's financial statements. At the end of the day, effective tax planning is a cost-reduction strategy.

Companies operating in Alberta need an approach for both good times and bad. Cost-reduction attempts often fail because they don't address baseline operating costs and third-party spending. Instead they regularly focus on reducing costs without addressing their spend culture and don't have a strong monitoring process to know if the plan is achieving desired results. Ad-hoc spending cuts can also do more harm than good and demoralize employees.